With its stock down 16% over the past three months, it is easy to disregard PETRONAS Chemicals Group Berhad (KLSE:PCHEM). Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. In this article, we decided to focus on PETRONAS Chemicals Group Berhad's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for PETRONAS Chemicals Group Berhad

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for PETRONAS Chemicals Group Berhad is:

4.9% = RM2.1b ÷ RM43b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.05 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

PETRONAS Chemicals Group Berhad's Earnings Growth And 4.9% ROE

It is quite clear that PETRONAS Chemicals Group Berhad's ROE is rather low. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 5.3%. Thus, the low ROE certainly provides some context to PETRONAS Chemicals Group Berhad's very little net income growth of 3.1% seen over the past five years.

We then compared PETRONAS Chemicals Group Berhad's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 7.1% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is PCHEM worth today? The intrinsic value infographic in our free research report helps visualize whether PCHEM is currently mispriced by the market.